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July 23, 2022

Value of Shares not an undisclosed investment is pledged as security for loans

by Admin in Income Tax

Value of Shares not an undisclosed investment is pledged as security for loans

Facts and Issues of the case

The assessee is a company which is a member of National Stock Exchange (“NSE”) and also of Bombay Stock Exchange (“BSE”). It is engaged in the business of share broking and depository service and brokerage from such services.

The appeal relates to  addition  of  Rs.  24,86,72,622/-  made  by  the AO under the head ‘Income from other sources’ which has been deleted  by the Ld. CIT(A).

The Ld. AO found that the assessee had taken overdraft facility against pledge of shares from  Citi Bank and Kotak Mahendra Bank Ltd.. The outstanding balance as on 31.03.2014 was Rs. 4,04,41,488/- and Rs. 3,72,99,393/- respectively. On perusal of details filed by the banks, the Ld. AO found that the assessee has pledged shares of total  value  of  Rs.  11,70,78,843/-  with  Citi  bank  and shares of total value of  Rs.  13,64,71,060/-  with  Kotak  Mahendra  Bank  Ltd. as on 31.03.2014. The value  of assessee’s own  shares  in stock as  per book was Rs. 48,76,981/- as on 31.03.2014.

The Ld. CIT(A) deleted the impugned addition.

Observations by the Court

The Court has given careful thought to the submissions of the rival parties. While making the impugned addition the Ld. AO observed that “it seems that the shares pledged by the assessee company with bank for obtaining working capital facilities were their own shares. In this light I am of the view that the value of  shares is an unexplained income  of  the assessee”. It  is  obvious  that the addition made by the Ld. AO was not based on any sound legal foundations but on conjecture and surmises. The Ld. CIT(A) quoted extensively from Circular No. 395 of NSE which allows the brokers to provide margin trading facility to their clients. For this purpose a broker may use his own funds or borrow from scheduled commercial bank and / or NBFCs, regulated by Reserve Bank  of  India.  The Ld.  CIT(A), therefore came to the conclusion that the assessee pledged shares  of  the clients with banks for obtaining bank finance in order to meet the requirement of depositing margin money by each of the clients as per the regulation of SEBI. We concur with the view of the  Ld.  CIT(A)  and hold that the Ld. AO was not at all justified in taking  value  of  shares  pledged  as security for taking loans from the banks as undisclosed investment of the assessee. The impugned addition has rightly been deleted by the Ld. CIT(A).


The value of shares pledged as security for loans cannot be considered as an undisclosed investment.


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